As spending on digital advertising keeps growing, companies must adapt their traditional marketing model and capabilities for the investment to be effective.

Digital-advertising spending is poised to enter the big leagues. While traditional media such as television currently maintain a sizable lead in expenditures, forecasts indicate that digital-ad spending is closing the gap, growing from $32 billion in 2011 to $60 billion (80 percent of TV-advertising total) by 2017.11.“US Total media ad spend inches up, pushed by digital,” August 22, 2013, eMarketer.com. And mobile-ad spending alone will account for 45 percent of all digital outlays by 2017.

Despite the surge in digital spending, the operational infrastructure required to make it work effectively (such as an agile IT architecture, automated processes, integrated business and IT capabilities) is painfully behind—even for those among the top 20 to 50 digital spenders in the world. In our experience, companies may be leaving as much as 20 to 30 percent of potential returns on the table. The reasons for this underperformance vary:

Digital spending can be highly fragmented. Across many organizations, business units pursue their own digital strategies with an independent digital-marketing budget (for example, tied to a business unit or type of customer), leading to varying results and limited economies of scale. Such fragmentation often makes it difficult to measure cross-channel effects. In addition, a lack of coordination between online and offline marketing groups—both internal and external—limits insight into which programs actually drive meaningful customer decisions and actions (also known as “attribution”).

Performance measures are averaged. Examining the performance of elements such as keywords and display-advertising placement on average, rather than individually, provides only a big-picture view. This prevents true understanding of which advertising vehicles are doing well and which aren’t.

Uncoordinated external agencies. External agencies are often hired to optimize different areas of digital marketing—for example, the agency handling the paid search budget may be different from the agency advising on organic search-engine optimization (SEO). This approach means that key decision makers spend more time trying to coordinate efforts and rationalize competing budget requests, often preventing them from having a unified view on how to allocate the company’s digital-marketing spending.

So how can companies unlock digital value? We believe there are five strategies they can implement to deliver both rapid returns and sustained growth:

Kill the average. A typical company’s digital buy can have as many as 20,000 keywords and 10,000 display ads by size, type, and placement, each with individual performance information. In such a data-rich environment, in-depth analysis at the granular level can identify significantly more value by uncovering both good and poor performance than reliance on misleading averages. One leading retailer, for example, believed it was getting solid returns from its keyword spending. Yet an in-depth assessment found that more than 50 percent of all keywords did not have a positive return on investment (ROI). When the company examined overall performance, it learned that the best keywords were masking poor performers, creating the illusion of strong across-the-board ROI. As a result, the company stopped paying for the majority of the poor-performing keywords, only keeping important ones for strategic reasons (such as keywords related to premium products).

Measure impact on the bottom line. Digital-marketing teams typically focus too narrowly on the number of purchases and cost per order (CPO) while ignoring the true bottom-line contribution of digital spending. Calculating metrics such as the gross margins or lifetime value generated from digital ads enables marketers to understand digital’s true impact. For example, one business-to-business player selected lead generation as its key metric to determine the effectiveness of its digital advertising. However, analysis of close rates and order values revealed a fivefold variability between the best and worst leads. With this clear outcome, the company shifted spending to the best-performing vehicles and was able to generate 15 percent more revenue without increasing its marketing budget.

Calculate digital’s total impact. Historically, companies have shied away from measuring the influence of digital on offline sales because they lacked an effective way to do so. However, several approaches—ranging from heuristics to survey data on the consumer decision journey to econometric modeling22.See Rishi Bhandari, Marc Singer, and Hiek van der Scheer, “Using marketing analytics to drive superior growth,” June 2014.—can enable companies to get a much clearer view of how digital channels affect analog ones (and vice versa). A top retailer tried a heuristic approach (systematic analysis based on logic and judgment) to better understand how digital ads influenced orders in nondigital channels and vice-versa. After an initial market-mix-model analysis identified total orders that came from digital, the team did supplemental analysis to measure the offline purchase propensity driven by online behavior. By analyzing web triggers and web behavior and linking it to purchase behavior (both online and offline), they discovered that digital ads were driving about 0.4 orders in other channels for every order they drove online. These figures significantly improved digital’s ROI and enabled marketers to build a compelling business case for increased investment in this channel.

Develop uniform digital-marketing tracking systems. Many companies lack a coordinated system to benchmark and track cost per click and cost per thousand impressions for display placements and keywords. Executives are forced to rely on individual agencies to determine whether rates are competitive. Best-in-class digital procurement relies on keeping up to speed with the latest innovations in the market (for example, real-time bidding) but also enforcing a unified cost model that all agencies use so that companies can clearly compare products and make better decisions.

Shift focus from paid media to owned and earned media. In the rush to boost returns from paid media, companies often overlook the significant value that can be captured by maximizing the value from owned media (such as a company website) and earned media (such as a blogger writing about your product).33.See David Edelman and Brian Salsberg, “Beyond paid media: Marketing’s new vocabulary,” McKinsey Quarterly, November 2010. When managed properly, this category can help reduce the need for paid media, driving higher ROI in the process. For example, a global financial institution discovered that it was spending 10 percent more on paid search than its competitors. The culprit: an ineffective SEO strategy. In response, the digital team reallocated a portion of paid-search dollars to boost SEO and conducted a thorough technical site audit, which drove higher value for the corporation. And one high-tech company reallocated spending from low-performing paid search and display advertising and invested in its website. By profiling different consumer paths for all incomplete checkouts on its website, it developed a tailored retargeting strategy for each type of consumer, which resulted in a twofold increase in ROI.

As the digital-ad market evolves, the choices that marketers must make will only grow in complexity. Having a unified system that introduces more transparency allows marketers to make better and more profitable decisions.

About the author(s)

Aditya Bhashyam is an associate principal in McKinsey’s Chicago office, Pallav Jain is a principal in the Atlanta office, and Kushan Surana is a consultant in the New York office.

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